This blog by a tax professor is about tax reform and moving tax systems into the 21st century. It focuses on tax system weaknesses, critiques selected reform proposals, and offers new ideas, with an emphasis on federal, California and multistate matters. Additional information - articles, reports and links, can be found at the 21st Century Taxation website (see link below right). I welcome your comments.

Search This Blog

Loading...

Sunday, December 30, 2012

New York Times Tax Reform Suggestions

A December 29, 2012 editorial in the New York Times, part of a series of suggestions for President Obama for his second term, makes the following recommendations.

Tax capital gains at the ordinary income tax rates. They note that the top 1% receive 70% of capital gains while the bottom 80% receive just 6%. Thus, they argue, taxing capital gains at 15% or 20% is "an indefensible giveaway to the richest Americans."

Cap the benefit of deductions for individuals at 28% or convert them to tax credits.

Higher rates on individuals with income over $1 million.

Restore the estate tax (presumably at the 55% rate scheduled to return on 1/1/13).

Higher corporate tax rates.

No more deferral of tax for US companies for income earned abroad (presumably they mean by subsidiaries).

The Treasury Department should "start work on tax reform now" including consideration of a carbon tax, VAT and financial transactions tax.

That is quite a list!

The editorial board notes that our current system is not bringing in enough revenues to cover spending and investment so new revenues are needed.

I have a few comments to offer:

Yes, tax reform is needed but not exactly for the reasons noted. The key reason for reform should be that our current system does not meet principles of good tax policy or fully recognize that we are operating in an information-age, global economy. Our tax system has grown complex by the addition of over 100 items after the Tax Reform Act of 1986 and has too many provisions that are temporary and often expired awaiting what often becomes retroactive renewal. Our tax system is not equitable. Significant deductions and exclusions provide significantly larger benefits to those in higher brackets. There are too many special rules that benefit just a few companies or industries. We have a $450 billion annual tax gap.

We have spending problems. One big one is that significant borrowing, particularly in the past few years has greatly increased the country's interest expense obligations. The GAO has issued a few reports pointing out over 100 areas where there is "evidence of duplication, overlap, or fragmentation among federal government programs." There is significant waste and inefficiencies in the medical care system with much of that paid for by the government (we hear about this often; I have seen this first hand lately with my 80-year old mother who now lives near me). AND, we have significant spending problems in our tax system with its $1.1 trillion dollars of annual tax expenditures (see page 28 of the Deficit Commission's 2010 report). If these could instead be relabeled as direct spending in the appropriate agency's budget, it would likely be easier to get rid of them. For example, I think that if the HUD budget had a line item - "Subsidy to middle-to upper income individuals to pay mortgage interest on vacation homes," the mortgage interest deduction for second homes would be gone. That is just one example. But all tax expenditures (special deductions, exclusions, credits and special rates not crucial to the design of an income tax) should be examined to see if they are serving a legitimate purpose, can be improved to better meet equity and simplicity goals, or can be eliminated in exchange for a lowered rate.

There are some reasons to tax capital gains at lower rates, particularly long-term capital gains. For example, some portion of a long-term capital gain does represent inflation. But treating all gains on assets held over one year at the same lower rate doesn't make sense. And, the lowered capital gains rate is not tied to inflation. So that theory doesn't work well with the current system. With the Tax Reform Act of 1986, the top rate for both ordinary and capital gain income was 28%. We managed to live with that. I think there are a variety of reforms needed for capital gains. Certainly, they should not be taxed at rate lower than the payroll tax rate for employees and self-employed (15.3% (other than in 2011 and 2012)) + the lowest individual tax rate. Why not use an inflation factor rather than a flat lower rate?

Given that other countries have lower corporate income tax rates and we are in a very competitive global marketplace, we should not increase the corporate tax rate. We should further examine how to modernize our business tax system (not just corporate tax system) for our new economy.

Yes, let's look at a VAT and see if it is something that states could join in on to help modernize their out-dated sales tax systems. The VAT might help with other federal issues. After all, almost all other countries have a VAT and that is likely how OECD countries help funded a lower corporate tax rate (by increasing the VAT rate).

Yes, let's look at a carbon tax as a polluter-pays tax to help reduce greenhouse gas emissions. We should see if this needs to be a separate tax or can be accomplished with a higher gasoline excise tax and some type of tax on other fossil fuels and other sources of GHG.

We should also be exploring how technology can improve tax compliance.

Starting point - let's articulate our economic, societal and environmental goals. Then let's see how our current taxes may work counter to those goals. That would help us in identifying problems along with evaluating our current rules against principles of good tax policy.

1 comment:

Took me time to read all the comments, but I really enjoyed the article. It proved to be Very helpful to me and I am sure to all the commenters here! It’s always nice when you can not only be informed, but also entertained! small business taxes

Welcome!

The world is changing yet tax systems have been slow to change in the same direction. This can hinder economic progress, lead to a loss in tax revenue, and frustrate taxpayers. Here, I explain some of the problems at the federal, multistate and California levels, offer ideas for reform, and an opportunity to comment on what I post. Thanks for reading and posting comments! If you have a short paper with a realistic idea for modernizing and improving our tax system that you'd like me to consider for posting here, please let me know (annette.nellen@sjsu.edu). This blog gets over 7,000 page views per month.

21st Century Taxation Website

Annette Nellen

About Me

I am a tax professor and Director of the MS Taxation Program at San Jose State University. I teach courses on tax research, tax accounting methods, high tech tax topics, taxation of property transactions, state taxation, ethics, and tax policy. I am active in the tax sections of the AICPA, ABA and CA Bar. I currently serve on the AICPA Tax Executive Committee and Tax Reform Task Force. I am a past chair of the AICPA Individual Taxation Technical Resource Panel and a past vice chair of the Executive Committee of the California Bar Tax Section. At SJSU I chair the Athletics Board and serve on the WASC accreditation steering committee. I welcome your comments to my blog posts.